Cotton, rice hit hardest under payment limits

Duane Dailey | Jul 18, 2003

Federal farm program limits would hit large farms growing cotton and rice harder than farms growing corn, soybeans, wheat or sorghum, according to a report released by the University of Missouri-Columbia.

“Strict payment limits could reduce national area planted to cotton by a half million acres and rice by 250,000 acres,” said Pat Westhoff, of the MU Food and Agricultural Policy Research Institute (FAPRI). He testified before the Commission on the Application of Payment Limitations meeting in Washington, D.C.

Imposing payment limits would create highly variable regional differences, Westhoff said. Nationally, payment limits would cut both the government costs and the payments to producers by about $430 million annually.

While the study considered implications of stricter limitations on farm program payments, it did not analyze any particular proposed legislation, Westhoff said. The stylized study assumed limits of $40,000 in direct payments, $60,000 in counter-cyclical payments and $175,000 in marketing loan benefits per farm operation.

The impact on acreage and on payments over the longer run would likely become smaller as producers made adjustments to their farming operations.

Based on a FAPRI baseline for commodity prices for 2004-05, 44 percent of the rice farms and 23 percent of cotton farms would have some payments limited if they did not change their operations to adjust to the assumed limits, Westhoff said. Those producers account for about 77 percent of the rice and 62 percent of the cotton grown in the United States.

If producers did not adjust, about 39 percent of the national rice crop would be ineligible for direct payments and 30 percent of the national cotton production would be ineligible for counter-cyclical payments.

In contrast, only 2 percent of corn and soybean farms would face payment limits. Those farms account for about 14 percent of the U.S. production.

Some changes in prices for cotton and rice could follow the shift in acreages. Prices could increase about 40 cents per hundredweight for rice and 1 cent per pound for cotton. Prices for other major field crops are marginally affected.

For crops other than cotton and rice, the net effect on planted acreage is small, Westhoff said. In Southern states there might be slight increases in crops such as sorghum and soybeans.

The acreage shifts are likely to be well within the bounds of annual crop acreage shifts. However, the changes might be concentrated in regions with large-scale operations and above-average production costs.

Landowners can also expect some changes in rental rates and land values under the payment limits.

“In areas where large-scale producers dominate and there are not major non-agricultural uses of land, the declines in rental rates and land values could be significant,” FAPRI reported. In areas of small-scale producers, the effect on land markets would be minimal.

Over the country as a whole, the decline in land values is estimated at 0.4 percent. That is consistent with an anticipated 0.5 percent reduction in estimated net farm income.

Overall, average annual net farm income between 2004 and 2012 would decline $238 million.

Westhoff noted that many more farms, which tend to be smaller, produce corn and soybeans than produce cotton and rice.

One difficulty in making this policy analysis is the fact that a single farm counted by the USDA Census of Agriculture is often organized as several business entities for purposes of government farm programs.

“It is hard to know exactly how any particular set of rules will affect the number of legal entities eligible for payments,” Westhoff said. “That makes it hard to know just how important any change in rules or dollar limits might be.”

Westhoff said the analysis on payment limits is one of the most difficult studies conducted by FAPRI, which provides independent policy analysis and price outlook information for the U.S. Congress.

Estimates of impacts are very sensitive to market conditions, Westhoff said. In times of low prices, marketing loan benefits and counter-cyclical payments are much larger than when prices are high. A fixed-dollar payment limit would affect more production when prices are low.

“The results are highly dependent upon the underlying assumptions,” Westhoff said. Because of the lack of data the analysts worked with farm census data from 1997, since the results of the 2002 census are not available. FAPRI did adjust the information from 1997 based on the trend in changes since the 1992 farm census.

The analysis did not look at specific legislation now being proposed, Westhoff said. “In assessing specific legislation, it would be especially important to evaluate the legal alternatives that producers would have to reorganize their operations so as to retain payment benefits.”

FAPRI does not have the legal resources to make that analysis, Westhoff added. “Experience suggests that producers will work hard to find ways to reorganize their operations to mitigate as many negative effects as possible from payment limitation rules.”

Duane Dailey is senior writer for Extension and Agriculture News at the University of Missouri.